Market to Market (January 7, 2022)

Jan 7, 2022  | 27 min  | Ep4721

Coming up on Market to Market -- A new year brings an old issue back to Washington. Widening packinghouse doors to increase competition. Breaking down the numbers on CRP. And market analysis with Jeff French, next.

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What's the most complex industry on Earth? It's not genetics, or meteorology, or logistics. It's a business that involves them all. It's farming. Thank you, farmers, from Pioneer.  

Sukup Manufacturing Company -- providing equipment and buildings to store and condition grain to help farmers adjust to market swings. We build drying, moving and storage equipment designed to preserve the quality of their crops. Sukup Manufacturing -- store now, profit later.

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Tomorrow. For over 100 years we have worked to help our customers be ready for tomorrow. Trust in tomorrow. Information is available from a Grinnell Mutual agent today.

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This is the Friday, January 7 edition of Market to Market, the Weekly Journal of Rural America.

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Hello, I’m Paul Yeager.

There was mixed news on the financial front as fallout from the great employment resignation and COVID. --

A modest 199,000 jobs were added last month pushing the unemployment rate down to 3.9 percent - approaching a 50-year low of 3.5 percent.

Solid job gains in recent months, and a declining unemployment rate has the Fed looking at raising interest rates in June as inflation hovers at 7 percent.

Creighton’s Mid-America Business Conditions Index rose to 64.6 to remain above growth neutral. Supply delays remain top of mind for business owners. —

A snowstorm struck the South and Northeast stranding hundreds of drivers for more than a day.

Parental advice is to have a full tank of gas before setting out on a journey. Ethanol producers hope drivers keep having choices at the pump for more of the corn-based product.

Here’s Peter Tubbs.

This week, the Environmental Protection Agency took public comments on their proposed rules for Renewable Volume Obligations. The RVOs dictate the amount of ethanol that gasoline blenders must add to the nation’s fuel supply.

Geoff Cooper, CEO, Renewable Fuels Association: “Our message to EPA during the hearing is that while their proposals are not perfect, we think what they're proposing is really a step in the right direction toward finally restoring some sanity toward it within the Renewable Fuel Standard Program.”

For 2021, the EPA estimates the RVO would be set at 18.5 billion gallons of renewable fuels. The 2022 RVO would rise to 20.7 billion gallons. 

The EPA has struggled to estimate renewable fuel demand as the economy recovers from drops in fuel needs caused by the COVID-19 pandemic. 

Geoff Cooper, CEO, Renewable Fuels Association: “The RFS actually has a self-correcting mechanism built within the program that when gasoline and diesel consumption is reduced because of COVID or any other market anomaly, the actual renewable fuel blending requirement adjusts lower by the same amount. And so there's no need no legal basis for EPA to go back in time and try to revise that number downward.”

The EPA also has proposed cancelling any outstanding Small Refinery Exemptions that let refiners out of their blending obligations.

Geoff Cooper, CEO, Renewable Fuels Association: 

“When they released this proposal, there were 65 of those exemption requests that were still pending. That represents about 3 billion gallons of renewable fuel requirements. So we're very happy to see EPA are taking a step toward denying all of those exemptions.” 

The public comment period is open through February 4th.

For Market to Market, I’m Peter Tubbs.

U.S. dairy producers got a win this week in a trade dispute with Canada. A USMCA mediation panel ruled Canada violated their allocation of tariff-rate quotas for U.S. exports of dairy products. The first-ever USMCA enforcement action should help American producers benefit from expanded market access.

U.S meat producers are looking for options on places to take their animals. This week, the Biden Administration announced a plan to widen options for locations beyond the big four packers.

John Torpy reports.

President Joe Biden, United States: “I've said it before, and I'll say it again: capitalism without competition isn't capitalism. It's exploitation.” 

This week President Joe Biden announced the allocation of $1 billion to advance expansion of small to medium-size meat packers and processors. 

President Joe Biden, United States: "Strengthening competition is good for all of us. Farmers and ranchers deserve a fair shake. American families facing high prices at grocery stores deserve a fair price to put food on the table.”

With funds from the American Rescue Plan Act of 2021, USDA plans to bolster the competitiveness of small and medium sized meat processors by assisting with equipment and infrastructure upgrades. Administration officials also seek rule changes to the Packers and Stockyards Act to increase price transparency.

Secretary Vilsack has made repeated trips to Capitol Hill for hearings on the state of the meat processing industry. Beef, pork, and poultry producers have continuously raised concerns about financial disparities between farmers and ranchers and the top four meat processors, Cargill, Tyson, JBS, and National Beef Processing. According to the president’s National Economic Council, meatpackers saw record profits in 2021, as their margins have risen 50 percent and net profits 300 percent since the beginning of the pandemic. 

For Market to Market, I’m John Torpy

Acreage battles happen every year as producers look to plant acres giving them the best chance at making money. 

However, the holders of millions of acres that have been set aside for environmental and financial gain are approaching a big decision. 

Here’s Colleen Bradford Krantz in this week’s Cover Story.

Melanie Aldrich, Emmons, Minnesota: “So this here is my CRP. There’s about 95 acres.”

Melanie Aldrich, a southern Minnesotan who previously farmed, stopped renting her land in 2015 and enrolled it in the federal government’s Conservation Reserve Program. Aldrich had grown tired of wondering every year which area farmer might rent the ground.

Melanie Aldrich, Emmons, Minnesota: “It was kind of a guaranteed income and really just a simple, like, I didn’t have to worry about is the farmer going to rent it next year.”

She signed a 10-year contract, which began in 2016, and is planning to reapply when it expires in 2026, assuming the payments remain competitive. But she says more farmers in the area prefer to plant crops or graze livestock.

Melanie Aldrich, Emmons, Minnesota: “I think smaller farmers are trying to farm as much ground as they can, and, you know, most people who own farms that are farmers want to farm the ground.”

Aldrich may be right about the mood of most farmers; the nation’s total acres enrolled in the various federal CRP programs has been on a downward trend for an unprecedented 13 years. The federal government is also facing the expiration of millions of acres’ worth of CRP contracts, a phenomenon that occurs 10 and 15 years after a large general CRP signup.

Kent Thiesse, Farm Management Analyst, MinnStar Bank: “Before the current year, you were at 20.5 million acres. So if your goal was to get to 27 million acres by the end of ‘23, you had to add about 6.5 million acres to get there. Plus you had these 9 million acres expiring. So that’s 15 million acres that you need to be looking at so that’s almost 75 percent of what you had enrolled in CRP. It’s a pretty daunting task.”

Most experts agree the primary factor in a landowner’s decision to try to enroll comes down to commodity prices. The peak in total CRP acres came in 2007, when the nation had 36.8 million acres enrolled. But when corn prices surpassed $7 a bushel the following year, then a historic high, farmers began placing fewer acres in conservation programs.

Kent Thiesse, Farm Management Analyst, MinnStar Bank: “And part of that was intentional by government policy lowering the maximum CRP acres in the 2014 Farm Bill to 24 million acres. And part of it has been economics because of improved profitability in crop production.”

Although federal officials have a maximum number of CRP acres that can be enrolled at a given time, it is becoming more unusual to approach that ceiling.

Kent Thiesse, Farm Management Analyst, MinnStar Bank: “There’s also limits on acreage within given counties and that part of that is related to maintaining agriculture, but also maintaining the overall economic viability in a community… That was basically done by Congress because of hearing from their farmer constituents that suddenly the USDA through the U.S. federal government was competing on land rental rates at an unfair basis…It was especially difficult for new or beginning farmers that were trying to rent land and, all of a sudden, the landowners is saying, ‘Well, I can get X amount of dollars for CRP. I can’t afford to rent it to you for this.’”

Thiesse points out that when the CRP program was kicked off in 1986, it was largely focused on reducing crop surpluses that were depressing commodity prices. The program now places greater emphasis on environmental aspects, meaning land along rivers or hilly areas is now far more likely to be accepted. In southern Minnesota, for example, the decline in acres and shift in location can be seen when taking a look at four key years between 1988 and 2019.

Kent Thiesse, Farm Management Analyst, MinnStar Bank: “The biggest increase we’ve seen in the last couple years in CRP acres has tended to be in the plain states and mountain states, where states like Minnesota, Iowa and Midwestern states have seen their CRP acreages going down… Interestingly, in 2018…specialized grassland CRP acres only made up about 2 percent of the total U.S. CRP acres and now it makes up 18 percent.”

Farm Service Agency Administrator Zach Ducheneaux says the agency is hoping to add greater flexibility when it comes to grazing livestock on CRP ground. Typically, grazing or baling hay on those restricted acres has only been allowed when specified in a contract or during periods of extreme drought. Ducheneaux says allowing more routine grazing would mean livestock producers could count on that grass from year to year.

Zach Ducheneaux, FSA Administrator: “One of the things we are examining is can we find the authority and support from Congress, our authorizers and our appropriators to stack our programs. So if we have this enrolled in the Conservation Reserve Program, can we come in there in times of drought with our emergency conservation program and help them put the hot wire fence and the temporary water source there?...There’s an argument made by some in the soil health field… that harvesting with animals is a more environmentally friendly, more wildlife-friendly method than harvesting mechanically.

Ducheneaux is optimistic the agency will regain lost ground by bringing in landowners who have not traditionally signed up, by emphasizing programs such as CRP Grasslands, which was new in the 2014 Farm Bill, and by possibly tying in carbon sequestration incentives.

Zach Ducheneaux, FSA Administrator: “Of the three million expiring acres last year, 62 percent were reenrolled in conservation programs. So we think that’s a pretty good indicator of the success of the program. More acres are staying in than are going out… So we have to make sure that we are providing a proper base of incentives for producers to have a viable choice.”

For Market to Market, I’m Colleen Bradford Krantz.

Next, the Market to Market report.

Traders seem to think the Plains’ wheat crop is in good enough shape while a series of major USDA reports wait in the wings. For the week, the nearby wheat contract sold off 8 cents while March corn added 14 cents. Changes in weather patterns were not enough to overcome a private estimate of a smaller South American crop. But whoa, Nelly, here came Friday with a volatile session. The March soybean contract jumped higher by 71 cents. March meal increased $25.90 per ton. March cotton expanded by $2.52 per hundredweight. Over in the dairy parlor, February Class III milk futures rose 86 cents. A down week in the livestock sector. February cattle shed $2.37. March feeders dropped $3.27. And the February lean hog contract lost $1.83. In the currency markets, the U.S. Dollar index added 14 ticks. February crude oil gained $3.72 per barrel. COMEX Gold decreased $32.30 per ounce.  And the Goldman Sachs Commodity Index gained almost 16 points to finish at 577.50.

Yeager: Joining us now to provide some insight is Jeff French. Hey, Jeff.

French: Hey, Paul. Great to be here.

Yeager: I think I can still say Happy New Year, it's still the first week.

French: Sure, Happy New Year.

Yeager: But we're going to try something right away and you have to watch the monitor because what I'm about to show you is a map that was put together, a series of maps of the drought in the United States. And we're going to focus on the wheat area first with these maps. It has been dry in the Southern Plains, it stretched to the Northern Plains, when you see the map this is in April. You can see in North Dakota, South Dakota it was extreme drought there and as the year progressed things got better and now there's this debate of are we better or are we worse? What do you see the disparity between the North and South Plains when it comes to wheat?

French: Well, it's two different classes. And we've got the hard red winter wheat obviously in dormancy here. Fundamentally we got the first winter ratings, the winter wheat is in poor condition, 25% to 30% of the crop is rated poor to very poor. But you've got to remember, money flow will always trump fundamentals, especially in the first week of January. And we've seen that here in the wheat. Wheat got to $2.50 premium to corn during the last month. Historically that is very expensive to corn. So that is corrected here the last two weeks, it's down a dollar in that spread. Historically maybe you see that spread 80 cents to a dollar over the corn market. So seasonally it has come in to narrow. We expect that. But I think the wheat just got a little bit overdone. So yes, it is dry, but it is January. It can improve in a long time.

Yeager: Does this selloff last much longer?

French: It's overdone. We spent this week, we sold a lot of $8 wheat earlier and we spent the last couple of days buying some of that back. But you've got to watch the March Chicago contract. You've got the 200 day moving average down there at $7.31. We tested that last night, got down to $7.35. But we bounced today. I think a lot of today was profit taking. Again, the funds have gone from being net long, betting for higher prices in the last couple of months, to here in the last few weeks they've actually sold their long positions and now they are net short wheat. They're looking for lower prices. So can they reverse and go long again? Sure. But I think right now here during the winter they're going to continue to sell wheat against being long corn and long beans.

Yeager: That's where I was going to go next. So, in corn what is this doing on the spillover into positions and what should farmers do in corn?

French: Well, if you look at it from the fund standpoint they're long probably 380,000 contracts of corn. And corn in the last 60 days has not done much. But you're sitting here at $6 futures, $6.10 futures, $6.05 in the old crop. These are fantastic prices. Basis levels are extremely strong. I would never tell anybody not to sell $6 corn. But if you are, just defend that sale with a cheap call option, especially going in with some of these explosive reports next week.

Yeager: Well, that is something we will discuss as we go on as it drips into all of these things. But I want to ask you a question that came in via Twitter. Matt in Nebraska was responding to something you tweeted earlier today. So forgive me, Matt, for kind of combining this. But he says, do you like Dec '23 corn sold at $5.15 even if ammonia goes to $2500 a ton?

French: Well, Dec '23 corn, that was a new contract high here today. I like selling new contract highs. And we're talking 5%, 10%, we're not talking too much. If that is our worst sale of 2023 corn is $5.15 I think we're going to have a pretty darn good year. But yeah, if we have $2500 per ton ammonia I think we have bigger issues here the next couple of years.

Yeager: Well, everybody thinks nitrogen, the ammonia is the big issue in the corn market. Is it? Or does that have an effect on other markets?

French: Yeah, it has an effect, especially some of the areas that don't normally grow corn, some of the “I” states, they're pretty set in their rotation. But the inputs will definitely affect those acres that are a little more mediocre out there. But I think in the “I” states you're going to see pretty much a normal rotation.

Yeager: Switch to soybeans. I think I got your attention when I said 70 cents on the week. 40 of it was today. What is going on?

French: Well, you have the funds are long, they're long about 100,000 contracts so they're looking for higher prices. Next week is expected to be extremely hot, we're talking 110 degrees down in Southern Brazil and Northern Argentina. So, you have the weather story. You also have, this is the first week of the year, so you have a lot of pent up energy, money being put to work on the long side. But then you also saw March soybeans close above $14 and when we traded above $14 it was quick, it was within 10 minutes that we were trading up to $14, $15. So charts look good, especially on the November '22. Beans, new crop beans are trying to buy acres, new contract high close here today up there around $13.20, extremely good price. Again, sell some grain here or protect it because these are phenomenal prices, I know it's a long time until harvest, but these are extremely good prices.

Yeager: So you answered my own question. Should you reward the market right now? What is a percentage ballpark of where maybe I should be thinking?

French: For the new crop we're not getting over -- 20%, 25% sold here, cover some of the inputs. Historically these are still very good prices. The old crop we’re about 80% sold on the old crop, we'll hold the 20% through the South American growing season because we all know that can get explosive. If they continue to stay hot and dry it is a La Nina year, it is expected to peak here at the end of January. But if they don't get these rains that are forecast in the next two weeks then we can go much higher.

Yeager: And there's a lot of people thinking that that's what is going to happen. But no one is a meteorologist, even they struggle sometimes to get the forecast right. Let's quickly slip in cotton because they had quite a series of moves this week as well.

French: Yeah, it's related to the bean market, new crop cotton, new contract highs right up there at 94 cents, just below 95 cents. Every time the beans gain in value the cotton is going to fight for acres there. So looking at the old crop cotton, traded up there in that $117, $118 area. $120 has been pretty stiff resistance in that March contract. I like selling some old crop cotton up here. If we get a close above $120 look to reown it.

Yeager: Meats are seeing a little bit of an impact of higher grain. They did rally when specifically live cattle when grain was lower. What's going there with live cattle?

French: Well, we've had excellent performance here in the feedlots. Carcass weights right now for this week are all-time highs, 12 pounds above last year levels. That's weather related. But the performance has been great. Seasonally I like cattle here. Nine out of the last ten years their first quarter prices for cattle are higher than the previous fourth quarter prices. And historically the highs for the first quarter prices in cattle are hit during March. So fourth quarter prices were $136 to $142 in the cash market. I like cattle here, especially if we can get through the next 30 days with the COVID. Demand has been exceptional. Numbers are coming down and I like this cattle.

Yeager: So would you be expanding a feedlot right now?

French: Well, I'd wait here and see if we can get through this next 30 days here. But I'm a buyer of cattle. I think the prices, the numbers fundamentally are going to get tighter, feedlot managers are going to have more leverage. The one thing you must watch though, kill capacity. If we start killing below 580,000 head per week and that comes to the packers, the absenteeism we've seen with the illnesses, you've got to watch that number because that is the thing that can affect this cattle market the most.

Yeager: If it's into processing then it could also impact the hog market too?

French: Oh certainly, absolutely. Hogs, the numbers on the hogs are friendly. We saw that last week in the hog and pig report. The charts look friendly. Now today they did have a big reversal. It was actually a textbook key reversal lower. I don't know if that was profit taking on Friday but we needed to see a lower close Monday might open the door to prices. But hogs fundamentally should be in strong hands. Again, you've got the summer months traded above a dollar a hundred, not bad protection at those levels, but hogs should be in strong hands here.

Yeager: I'm going to put you out on a limb in Market Plus on a prediction about USDA's report on Wednesday. But before we go here in this discussion, the dollar impact. It has been fighting up and down and the grains seem to be responding to it. Do you see that moving forward that the two are in concert for the foreseeable future?

French: Well, on the export market absolutely. The dollar is at 95 cents here, it has been up at these levels for about the last two and a half, three months, that's strong if you look at it here in the last couple of years. Absolutely will affect the exports. Beans, wheat, bean meal and bean oil all had marketing year lows in exports last week and that is probably a result of the strength in the dollar.

Yeager: All right, thank you so very much, Jeff, the gold medal performance, golden performance there for you. Thank you.

French: Thanks, Paul.

Yeager: That will do it for our installment of Market to Market. We will talk more in Market Plus so you can join us there. Find that on our website which is MarketToMarket.org. Now, if you have made a New Year’s resolution to spend more time on social media, how about making Instagram part of the plan, specifically ours? We have behind-the-scenes pictures and stories on our feed of MarketToMarketShow. Next week, we examine the major government reports with a panel discussion. Thank you so very much for watching. Have a great week.

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Trading in futures and options involves substantial risk. No warranty is given or implied by Iowa PBS or the analysts who appear on Market to Market. Past performance is not necessarily indicative of future results.

Market to Market is a production of Iowa PBS which is solely responsible for its content.

What's the most complex industry on Earth? It's not genetics, or meteorology, or logistics. It's a business that involves them all. It's farming. Thank you, farmers, from Pioneer.  

Sukup Manufacturing Company -- providing equipment and buildings to store and condition grain to help farmers adjust to market swings. We build drying, moving and storage equipment designed to preserve the quality of their crops. Sukup Manufacturing -- store now, profit later.

(music)  

Tomorrow. For over 100 years we have worked to help our customers be ready for tomorrow. Trust in tomorrow. Information is available from a Grinnell Mutual agent today.

(music)

 

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